Apartment Absorption Outruns Construction in Q1

The development of new apartments nationwide has been nothing if not brisk since the end of the recession, but it does have its ups and downs.

The development of new apartments nationwide has been nothing if not brisk since the end of the recession, but it does have its ups and downs. In the first quarter, the delivery of new units was low enough that demand handily outstripped the new supply by about 8,500 units, driving down overall vacancies somewhat. In fact, the slightly more than 28,800 new units that came on line in the first quarter of 2015 represented the lowest number since the first quarter of 2013, according to the first quarter apartment report by Reis Inc., which was published recently, as prepared by the company’s senior economist and director of research Ryan Severino.

Even so, net absorption wasn’t that strong during the first quarter, either. Almost 37,350 units were absorbed during the quarter, according to Reis, which was the fewest since teh second quarter of 2013. But in the longer run, apartment absorption remains quite resilient, with a total of about 160,000 units absorbed during the last four quarters. “With the economy and labor market poised to have a strong 2015, we see no reason why net absorption should decline from its current levels for at least the next two years,” the report predicted. Good news for owners and developers.

On the other hand, Reis adds, although demographics are favorable to apartment demand, ultimately demand will fail to keep pace with new supply growth. The report puts it this way: “In a number of markets, there are cranes building apartments as far as the eye can see. Thankfully, because the market is currently so tight, it will take a number of years before the increase in vacancy stymies rent growth.” Rent growth certainly won’t be stymied much this year, at least not in most U.S. markets. Reis forecasts an average growth of about 3.5 percent in rents this year, meaning that some places can expect even stronger rent growth.

The first quarter report pays special attention to Houston, since the the potential impact of falling energy prices hangs over the market. The relative good news is that the energy sector’s difficulties haven’t affected demand for apartments in Houston yet; during the first quarter, the vacancy rate didn’t move, standing at 5.5 percent, and rental growth continued to be strong. Houston has a more diversified economy than it used to, after all. However, the largest risk for the Houston apartment market going forward doesn’t actually seem to be energy woes. Instead, the massive amount of new supply slated for completion in the next few years promises to spur increased vacancies and put a check on rental increases.